I am pleased to support the interim final rule to defer the phase 5 compliance date of September 1, 2020 to September 1, 2021 in light of the unprecedented economic and social impacts of COVID-19.  Under these difficult circumstances, I think it is appropriate to provide phase 5 firms with additional time to comply, ensuring that their already strained resources are not diverted from ongoing business continuity efforts.  I would also support a one year deferral for the phase 6 compliance date, in line with the BCBS-IOSCO recent amendments to the recommended margin framework to push out, respectively, the phase 5 and phase 6 compliance dates by one year.[1]  As I have noted previously, given the large number of firms brought into scope during phases 5 and 6, the estimated 7,000 initial margin relationships that need to be negotiated, and the small overall percentage of swap activity these firms represent, a one year deferral for these final phases is appropriate in order to facilitate an efficient, orderly transition for the market into the uncleared margin regime. 

As we approach these final compliance deadlines, I also think it is appropriate to reflect on how the uncleared margin regime can be improved to address some of the compliance challenges experienced in earlier stages.  During last week’s meeting of the Global Markets Advisory Committee (GMAC), I found the presentation of the Subcommittee on Margin Requirements for Non-Cleared Swaps regarding its recommendations to improve our margin framework to be incredibly informative.[2]  I look forward to working with staff to review all of the Subcommittee’s recommendations and I appreciate the hard work, thoughtfulness, and dedication that went into producing the Subcommittee’s report.

Over the past few months, the CFTC has been focused on responding to the tremendous impact of the coronavirus on the markets we regulate.[1]  I would like to highlight some of the additional steps the agency has taken since our last open meeting in April to help address the spread of the coronavirus and its impact on the derivatives markets.

Prioritizing Agricultural and Energy Markets

First, the agency has continued to monitor closely and prioritize agricultural and energy markets, which have witnessed significant volatility in the wake of the coronavirus pandemic.

As is well-known among the followers of our agency’s work, the CFTC traces its heritage back to the Grain Futures Act of 1922, which focused on regulating various kinds of agricultural commodity contracts—among the nation’s first derivatives products. Given our roots, these markets—and the agricultural community more broadly—are always top of mind for me as the CFTC’s Chairman and Chief Executive.  We continue to monitor these markets closely, particularly with respect to certain livestock contracts where there have been wide spreads between cash and futures prices.  A dedicated Livestock Markets Taskforce consisting of staff from the Division of Enforcement and the Division of Market Oversight is paying special attention to ensure these markets are functioning properly and without misconduct.

We are also showing our commitment to American agriculture in other ways. For example, the CFTC has for the first time appointed an official liaison with the U.S. Department of Agriculture.  I am pleased to announce that Christa Lachenmayr, a senior agricultural economist in the Division of Market Oversight, will be the first CFTC staff member to hold this position.  The timing could not be better, with the CFTC and USDA working closely together to understand coronavirus-related factors that have a direct impact on market fundamentals.  I am also pleased to announce Darryl Blakey has joined the CFTC from the National Cattlemen’s Beef Association as Associate Director of the Office of Legislative and Intergovernmental Affairs.  The deep agricultural backgrounds of Christa and Darryl will be critical for our efforts moving forward.

We are also focusing on the nation’s energy markets.  Last month, we saw a historic drop in the May futures contract for West Texas Intermediate Crude, which briefly traded at negative prices for the first time ever.  Clearly, there were unique macroeconomic factors at play: a historically high supply of oil, a fight between Saudi Arabia and Russia for market share, and a simultaneous drop in demand that was unprecedented in both speed and severity due to the coronavirus. The markets were digesting a lot of information and it happened to coincide with the expiration of a futures contract.

While this event was not a surprise for the CFTC, which for weeks had been in regular contact with exchanges in anticipation of negative futures prices, we nevertheless issued a joint Staff Advisory to remind DCMs, FCMs, and DCOs of their responsibility to prepare for the prospect that certain contracts may continue to experience extreme market volatility, low liquidity, and possibly negative pricing.  The CFTC has also been in close contact with the U.S. Department of Energy to ensure we have the most current information impacting those markets, including on-the-ground details that impact the natural gas and crude oil futures markets.  Secretary Broullette and I have discussed these markets as well, and we are committed to continue working together in order to maintain orderly markets and a secure supply chain for these important sources of energy.

Granting Additional Targeted, Temporary Relief

Second, we have issued additional targeted, temporary relief to market participants. This includes relief to registrants listing new principals and to applicants for registration as associated persons from the requirement to submit a fingerprint card for those individuals.[2]  I am proud of how the CFTC has risen to this occasion, acting on a bipartisan basis to approve more than a dozen temporary relief measures since this crisis began.

Protecting Customers

Third, we have also continued to bolster the CFTC’s customer education efforts. Times such as these unfortunately create new opportunities for fraud, and we have increased our efforts to arm the public with information so they can detect and avoid these illegal schemes. Most recently, we issued a Customer Advisory informing the public about the unique risks associated with certain trading vehicles that use futures contracts or other commodity interests as they make investment decisions during the COVID-19 pandemic. This is the third Customer Advisory the CFTC has issued in response to the pandemic and is a joint product of the Office of Customer Education and Outreach and the Division of Swap Dealer and Intermediary Oversight. We have also begun publishing a series of web articles that examine frauds and other scenarios in detail so customers can be aware of them. All these customer education materials, along with all official coronavirus-related CFTC actions, can be found at cftc.gov/coronavirus.

Gaining Insight through Our Advisory Committees

Finally, the CFTC’s advisory committees have been hard at work and enabling our Commission to gain valuable insight from external stakeholders.

• The Global Markets Advisory Committee (GMAC), sponsored by Commissioner Dawn Stump, held a public meeting on Tuesday, May 19, 2020.[3]  During the meeting, the GMAC discussed (1) the international coordination efforts in the time of COVID-19, and (2) its Subcommittee on Margin Requirements for Non-Cleared Swaps’ report and recommendations regarding the implementation of initial margin requirements for non-cleared swaps.
• The Agricultural Advisory Committee (AAC), which I sponsor, held a public meeting on Wednesday, April 22, 2020.[4]  The meeting focused primarily on the COVID-19 pandemic and its impact on our nation’s farmers and ranchers. We were delighted to host U.S. Secretary of Agriculture Sonny Perdue as our special guest.
• The Market Risk Advisory Committee (MRAC), sponsored by Commissioner Rostin Behnam, invited public comment on topics and issues being addressed by its Climate-Related Market Risk Subcommittee.[5]
• The Energy and Environmental Markets Advisory Committee (EEMAC), sponsored by Commissioner Dan Berkovitz, held a public meeting on Thursday, May 7, 2020, to hear remarks on the Commission’s Position Limits for Derivatives proposed rule, as approved on January 30, 2020.[6]

Conclusion

As pleased as I am with these efforts by the Commission and our staff, I know that our work is not done responding to coronavirus-related market disruptions.  As we continue to address the impact of the pandemic on the markets we regulate, the CFTC will not lose sight of our broader mission to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.  We owe the American people, who are sacrificing greatly at this time, nothing less.

I am pleased to support today’s proposal to amend the Commission’s regulation providing an exemption from registration for a foreign commodity pool operator trading on U.S. markets on behalf of foreign investors.[1]  Building on previously granted staff no-action relief, the proposal would create new possibilities for fund managers and provide for simplified compliance.  At the same time, the proposal ensures that the Commodity Exchange Act continues to protect U.S. market participants.  Like the Commission’s proposal from January addressing its jurisdiction over foreign swap dealing activities,[2] >this rulemaking sensibly marks the boundaries of the Commission’s reach into foreign derivatives trading activities in light of market realities.  And like the proposal from earlier this year amending the Commission’s regulations governing commodity broker bankruptcies,[3] in this rulemaking the Commission staff applies their experience to make the Commission’s regulations more efficient. 

I would like to highlight certain aspects of the proposal.  It would permit a foreign fund manager to satisfy the exemption’s requirement that its pool does not contain funds of U.S. investors by complying with certain safe harbors, such as fund documentation disclosures.[4]  The proposal recognizes that the manner in which fund interests are sold in the real world often makes it impossible for a fund manager to make a blanket attestation that there is no U.S. investment in a given commodity pool.  I am also particularly pleased to see that U.S. affiliates of foreign pools would have the ability to contribute initial capital to those pools.[5] 

I applaud the staff of the Commission for continuing their work despite the COVID-19 pandemic and I look forward to reviewing the industry’s comments.

In 2018 and 2019, I had the opportunity to participate in a number of discussions with the International Organization of Securities Commissions (IOSCO) Board related to the final phase of margin requirements for non-centrally cleared derivatives.  Unique considerations for this phase were evident, and the global talks ultimately resulted in recommendation by the Basel Committee on Banking Supervision (BCBS) and IOSCO to extend and stagger the final implementation periods.[1]  These recommendations were agreed to in July 2019 and therefore pre-date COVID-19.  In response, and unrelated to the pandemic, the Commodity Futures Trading Commission (CFTC) finalized in March of this year an amendment to its Margin Rule to extend the compliance schedule for initial margin by splitting Phase 5 into two parts and creating a new “Phase 6.”[2]

Then in light of the challenges presented by the COVID-19 pandemic, BCBS and IOSCO more recently in April of 2020 amended their recommended margin framework to defer each of the Phase 5 and Phase 6 compliance dates by one year.[3]  I support the interim final rule we are considering today, which would accomplish that extension for Phase 5, specifically in response to extraordinary current events.  I look forward to soon considering a proposal to extend the Phase 6 compliance date as well.

I also hope that the Commission will soon consider addressing a number of recommendations included in the report recently prepared by the Global Markets Advisory Committee’s Subcommittee on Margin Requirements for Non-Cleared Swaps and adopted by the Global Markets Advisory Committee.[4]  The subcommittee’s charge was not pandemic-related, and the issues discussed in the report remain despite the extended Phase 5 compliance date we are considering today.

Overview

I am pleased to support the proposal before us today to amend Rule 3.10(c)(3) in order to clarify that a non-US person does not have to register as a commodity pool operator (“CPO”) with respect to its operation of offshore commodity pools for non-US participants that trade in US derivatives markets, even if that CPO also operates other commodity pools with US participants for which it is registered (or claims another exclusion or exemption from registration).  The proposal addresses an important issue, and arises from comments on a different proposed rulemaking that we issued back in October 2018.

I want to thank Chairman Tarbert for giving us the opportunity to advance this proposal, given that he wasn’t at the Commission in October 2018, and so I doubt this issue was on his radar when he was confirmed as Chairman.  And I want to thank the staff of the Division of Swap Dealer and Intermediary Oversight, the General Counsel’s Office, and the Chief Economist’s Office for working so hard on this proposal in addition to the many other important priorities that the Chairman has laid out for us to complete this year.

Today’s proposal is in keeping with a couple of principals that I have discussed in relation to prior rulemakings.  First, it reflects the benefits of acting to codify staff relief where appropriate and to periodically re-visit our rules.  And second, it carries on the Commission’s long tradition of deference to our international colleagues to regulate individuals and activities in their own countries where their regulatory interest is paramount.  I would like to take a few minutes to talk about each of these principals in the context of the treatment of offshore commodity pools operated by non-US CPOs in Rule 3.10(c)(3).

The Benefits of Codifying Staff Relief and Re-Visiting Existing Rules

First, the benefits of acting to codify staff relief where appropriate, and to periodically re-visit our rules.  Our staff often has occasion to issue relief or take other action in the form of no-action letters, interpretative letters, or advisories on various issues and in various circumstances.  This affords the Commission a chance to observe how the staff action operates in real-time, and to evaluate lessons learned.  As I have previously noted, with the benefit of this time and experience, the Commission should then consider whether codifying such staff action into rules is appropriate in order to provide legal certainty to the marketplace.[1]

Although it took quite a while, that is what has happened here.  In 1996, Commission staff issued Advisory 18-96, which provided relief from certain regulatory requirements for registered CPOs with respect to their offshore commodity pools.  In October 2018, the Commission proposed to codify Advisory 18-96 – a proposal that the four sitting Commissioners who were here at that time all supported.

Although commenters generally supported the proposal as well, several of them disagreed sharply with statements in the proposed rulemaking release regarding the separate question of when, pursuant to Rule 3.10(c)(3), non-US CPOs operating offshore commodity pools must register in the first instance.  The 2018 proposed rulemaking stated the view that Rule 3.10(c)(3) applies on an “all-or-nothing” basis, so that a non-US CPO that operates one or more commodity pools with US participants and other pools without, could have to register as a CPO for all its pools.  A number of commenters, by contrast, read Rule 3.10(c)(3) to apply on a “pool-by-pool” basis, such that non-US CPOs are required to register (or claim another registration exclusion or exemption) with respect to their commodity pools with US participants, but not with respect to their offshore commodity pools without US participants.

I do not take sides in that debate.  I was not here in 2007 when Rule 3.10(c)(3) was adopted, and all I can say is that I have read it many times since October 2018 and I can see how reasonable minds can interpret the wording differently.

But what is important to me is that, by acting to codify Advisory 18-96, we discovered the need to re-visit Rule 3.10(c)(3) – which is what today’s proposal is about.  As I have said before, “[i]t is simply good government to re-visit our rules and assess whether certain rules need to be updated, evaluate whether rules are achieving their objectives, and identify rules that are falling short and should be withdrawn or improved.”[2]

Today, we are proposing to update Rule 3.10(c)(3) to better align it with the realities of the modern international investment management environment.  As the release observes, many large CPOs with substantial assets under management are located outside the United States and operate on a global scale to benefit their clients in what is a global derivatives market.  A rule in which a CPO outside the United States with many different commodity pools could have to register with the Commission with respect to offshore pools that have no US participants simply because it also operates other pools in which US persons do participate is often unworkable from an operational standpoint, and as I will discuss shortly, makes little sense from a regulatory standpoint.  Accordingly, we are proposing to improve Rule 3.10(c)(3) to clearly and unequivocally embrace the pool-by-pool approach.

Deference to International Colleagues with a Paramount Regulatory Interest

Such an approach reflects appropriate deference to our international colleagues where they have a paramount regulatory interest.  I noted last year when the Commission proposed two rulemakings concerning non-US clearinghouses, that “[w]e cannot effectively supervise [clearinghouses] in every corner of the world.”[3]  Nor can we do so for CPOs.

Indeed, the Commission was realistic about the limitations on its ability to regulate CPOs outside US borders operating commodity pools with participants that also are outside US borders in its proposed codification of Advisory 18-96 in October 2018.  The preamble of that release quoted a statement by the Commission over 30 years ago that has been oft-cited in the years since then:

“‘[G]iven this agency’s limited resources, it is appropriate at this time to focus [the Commission’s] customer protection activities upon domestic firms and upon firms soliciting or accepting orders from domestic users of the futures markets and that the protection of foreign customers of firms confining their activities to areas outside this country, its territories, and possessions may best be for local authorities in such areas.’”[4]

The Commission then stated its belief “that this rationale continues to be true with respect to CPOs and commodity pools . . .”[5]

As I have said before, the Commission’s historical commitment to appropriate deference to our international regulatory colleagues (which also is sometimes referred to as mutual recognition), “is a demonstration of international comity – an expression of mutual respect for the important interests of foreign sovereigns.”[6]  This deference also reflects the shared goals of global authorities seeking to achieve the most effectively regulated markets through coordination rather than duplication.

When a commodity pool with a non-US CPO has US participants, or when a commodity pool’s CPO is in the United States, we regulate accordingly.  But the Commission should not impose registration and regulatory requirements on non-US CPOs with respect to their operation of offshore commodity pools for non-US participants.  In such circumstances, the protection of the foreign pool participants is best left to our international counterparts, as their regulatory interest is greater than ours.[7]>  That result makes sense, and would be achieved by the application of Rule 3.10(c)(3) on a pool-by-pool basis.

Conclusion

I therefore support today’s proposal.  Of necessity, the rulemaking release recounts some of the history regarding Rule 3.10(c)(3).  But I would ask those planning to comment that we not re-litigate the debates of the past, but rather focus on the future and the rule amendment that is being proposed.  I look forward to reviewing the public’s comments on that proposed amendment.  And I again want to thank the staff for the time and effort they have put into answering questions and addressing comments about this rulemaking from me and my team.

If there were no uncertainty, there would be no derivatives markets. Indeed, the CFTC is in the business of regulating markets that enable market participants to hedge their risks. But there are some exogenous events that come but once a century—a so-called Black Swan—which even prudent risk management can neither foresee nor adequately prepare for. The United States and much of the world is now facing such an event in the form of the COVID-19 (coronavirus) pandemic.

Two months ago, the Commission voted to extend the compliance schedule for initial margin requirements for uncleared swaps for those entities with the smallest swaps portfolios.[1] This extension split Phase 5 of the schedule in two, creating a new Phase 6 composed of entities with swaps portfolios between $8 billion and $50 billion in average aggregate notional amount (“AANA”).

The Commission deferred the compliance deadline for entities in this new Phase 6 for one year. This was due to the complex operational burdens these entities will face and the fact these entities account for less than 3 percent of total uncleared swaps AANA.[2] Phase 5—which comprises entities with larger swaps portfolios[3]—remained subject to the prior compliance deadline.

These timelines did not factor in the most severe economic downturn the world has witnessed since the Great Depression. Today we are doing so. Accordingly, I support our interim final rule (“IFR”) deferring the compliance date for the Commission’s initial margin requirements for uncleared swaps in response to the coronavirus pandemic. This rule would provide a one-year extension for Phase 5 entities, which would otherwise become subject to initial margin requirements in just three months, on September 1, 2020. I believe issuing this IFR is appropriate from both a substance and a process perspective.

Need for the Extension

First, allow me to explain the substance of why an extension is necessary. As everyone listening is painfully aware, we are in the midst of a global pandemic. Economies across the world have largely shut down in response to social distancing needs. Market volatility has reached historic levels. Financial firms, like so many other organizations, have been forced into a near-total remote-working posture. These extraordinary market conditions and operational shifts demand that financial firms—including those regulated by the CFTC—devote an inordinate amount of time and resources to day-to-day operational, business continuity, and risk-management efforts.

Preparation for compliance with initial margin requirements requires procuring compliant documentation; setting up custodial arrangements; and establishing internal processes for the calculation, collection, and posting of initial margin, among other things. These steps are both time intensive and resource intensive. For many firms, the intense effort necessary to meet the imminent compliance deadline would divert focus and resources from their respective coronavirus responses. Moreover, working from home has made it difficult to access required legal and operational documentation and communicate with counterparties.

Recognizing these concerns, the Basel Committee on Banking Supervision and International Organization of Securities Commissions have jointly extended their initial margin compliance schedule. Several BCBS/IOSCO members have already taken steps to implement this relief.

As I have said before, the CFTC’s margin rules are a key systemic risk mitigant. However, the market participants receiving an extension under this IFR have some of the smallest uncleared swaps portfolios. Indeed, Phase 5 entities collectively represent only 8 percent of total AANA across all margin phases.

We must balance the critical need to marshal scarce operational resources for pandemic response against the relatively small risks posed by a one-year compliance delay. The circumstances here weigh clearly in favor of being consistent with our international counterparts in granting the extension.

Need for an Interim Final Rule

Now, I will address the process for granting this extension. I have made very clear in the past that I believe the Commission should regulate via notice-and-comment rulemakings where possible. This gives the public a voice in the regulatory process and provides the agency the benefit of commenters’ expertise and experience. Indeed, since I joined the CFTC last July, we have issued 11 final rules and 15 proposed rules, not counting the two we are voting on today.

However, as I have said before, there are certain circumstances in which prior notice and comment is not an ideal regulatory vehicle. Congress recognized this in the Administrative Procedure Act. For example, the statute makes clear that agencies need not engage in the prior notice-and-comment process where doing so would be “impracticable, unnecessary, or contrary to the public interest.” In those circumstances, agencies may issue an interim final rule—that is, a rule that is effective after issuance without further public comment and agency response. The public may comment on the IFR after it becomes effective, and the agency may issue a revised final rule if those comments warrant changes to the IFR.

Here, providing a public comment period before issuing the extension would be both impracticable and contrary to the public interest. Challenges related to the coronavirus pandemic have already become dire. And because the current deadline for Phase 5 firms is only three months away, initial margin preparation demands are extremely pressing right now. If we opened even the shortest permissible comment period and incorporated those comments into a final rule, any relief issued likely would already be moot. Although we are soliciting comments on the IFR, we believe that Phase 5 entities need relief that is effective now in order to maintain focus on the real business continuity and risk-management issues they are facing today.

By contrast, because the Phase 6 compliance date is not until September 2021, the CFTC will address an extension for Phase 6 through the traditional notice-and-comment rulemaking process. However, I recognize the importance of clarity and certainty for Phase 6 market participants. So I expect we will issue a proposed rule in that regard in the very near term and proceed with that rulemaking as expeditiously as possible.

As previously demonstrated by our staff’s coronavirus-related no-action relief,[4] the CFTC stands ready to do whatever is necessary to help regulated entities weather the current crisis. I hope today’s compliance schedule extension will help give firms the capacity they need to do so. 
 

[1] Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 85 Fed. Reg. 19,878 (published in the Federal Register Apr. 9, 2020) (“March 2020 IM Rule”).

[2] Statement of CFTC Chairman Heath P. Tarbert in Support of Extending Relief for Initial Margin Requirements for Uncleared Swaps (Mar. 18, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement031820 (citing Richard Haynes, Madison Lau, & Bruce Tuckman, Office of the Chief Economist, CFTC, Initial Margin Phase 5 (Oct. 2018)).

[3] As a result of the March 2020 IM Rule, Phase 5 is now made up of entities with $50 billion to $750 billion in AANA.

[4] These no-action letters are available at https://www.cftc.gov/coronavirus.